# How does borrowed money affect GDP?

Suppose that a household borrows from the bank with %2 interest rate and uses the money for paying rent;

1. Is this a Consumption?
2. May households borrow money from the bank for consumption, not investment purposes? (I haven't seen such thing in a circular flow graph, that's why I'm asking)
3. Is factor payments are being paid to another household who lends his savings to the bank?
4. Is this payment of saving is counted as lender's income?
5. What kind of approach of GDP would borrowing money from the bank for paying the rent, and interest income earned by another househould?
• Whether or not something is consumption is not concerned with how it is financed. Dec 20, 2016 at 5:26

Yes, this is consumption.

There are 3 ways to calculate GDP, income effect, value added effect, and value of final products.

The simplest to understand is probably the income effect where the value of all wages and profits at every stage of production are added together to find final GDP. Since the household has paid rent and paid the bank for a service both payments count towards the income of both the landlord and the bank.

If the household in your example borrowed $1000 to spend on rent at 2% interest and then paid back that $1020 next year it would be a $1020 net gain for GDP with $1000 going to the landlord's income and $20 going to the bank's income for their service of lending out money. If the household defaulted on its debt then the bank would report a loss of $1000 on their income which would cancel out the \$1000 gain on the part of the landlord.

@TheSaint321: The "three ways to calculate GDP" are not income, value added and value (and are not "effects" but "aspects" or "sides"), but income, expense and value added.

1. You ask about "this", but you mention several flows: (a) money borrowed from bank (b) money paid as rent and, possibly (c) return of money to bank, and still (d) an interest charge remunerating the loan. Then, flow (b) is included in conventional GDP as consumption in "expense side", and as rents in "income side". Regarding value added, it is included as "housing services". Flows (a) and, when and if it realizes, (c) are transfers not included in GDP. Finally, (d) is consumption, interests and financial services, respectively in the expense, income and value added sides of GDP.

2. Ask your bank for the possibility :-) In fact, that often happens, though it's not a good idea. Any graph you'll find is a simplification. You can even find some in which borrowing is only made by firms because households are negligible there and Government and "Rest of the World" are simply not taken into account.

3-5. I don't understand the questions. Sorry.